From the Desk of Joe Rollins
I have been overwhelmed with questions regarding the economy and what has been going on with the stock market over the last month and I am beginning to believe that the public is being overwhelmed with fake news. I read an article the other day that said the vast majority of Americans believe we are already in recession; they fear for their jobs and the ability to support their families. However, the evidence is so far removed from those statements that it must be bewildering to someone who actually reads the facts.
I hope I can give you some information in this posting regarding the excellent month of October we enjoyed, but more importantly, explain to you why the economy is not in recession. If you believe the lines they give you on TV, you need to do your own homework. I also want to explain employment which seems to have gotten confused with the economy since people do not understand that layoffs do not necessarily create a recession. Lastly, I want to go through my reflections on meeting with Elon Musk in New York and hearing his coherent statements regarding virtually anything as compared to politicians. Of course, I will touch on the elections and the reasons why they were important for further stock market increases.
I have been overwhelmed with questions regarding the economy and what has been going on with the stock market over the last month and I am beginning to believe that the public is being overwhelmed with fake news. I read an article the other day that said the vast majority of Americans believe we are already in recession; they fear for their jobs and the ability to support their families. However, the evidence is so far removed from those statements that it must be bewildering to someone who actually reads the facts.
I hope I can give you some information in this posting regarding the excellent month of October we enjoyed, but more importantly, explain to you why the economy is not in recession. If you believe the lines they give you on TV, you need to do your own homework. I also want to explain employment which seems to have gotten confused with the economy since people do not understand that layoffs do not necessarily create a recession. Lastly, I want to go through my reflections on meeting with Elon Musk in New York and hearing his coherent statements regarding virtually anything as compared to politicians. Of course, I will touch on the elections and the reasons why they were important for further stock market increases.
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Ava Rollins and her friends having a roaring good time on Halloween |
If anybody tells you they can forecast a bottom to the stock market, they are just born liars. No one has ever been able to do so, and if anyone could do so, they would certainly keep it to themselves. What we do know, historically speaking, every sizable stock market decline has represented a sure-fire buying opportunity for long-term investors. I know it is hard, you just have to hold your nose and buy on the dips. Did you realize that over the last 70 years the stock market has declined by over 10% on 39 separate occasions? You probably did not realize that market corrections were as common as those facts tell you. Yet, in every one of those 39 declines of 10% or more (except for the current one) a bull market rally eventually recoups all that was lost. Given that it is a 100% recuperation of all losses indicates this too at some point will pass. A really good time to invest.
Before I cover all those interesting topics, I need to report on the very excellent month we had in October. The Standard and Poor's Index of 500 Stocks was up 8.1% for the month of October, but yet is still down 17.7% for the year 2022. Once again, I point out the 10-year returns on this index, even with this very down year, average 12.8%. The Dow Jones Industrial Average was up 14.1% for the month of October yet is still down -8.4% for the year 2022. The 10-year average on this index is 12.2%. The NASDAQ Composite was up 4% for the month of October but is still down significantly at 29.3% for the year 2022. The 10-year average on this index, due to its more volatile nature, is also the highest at 15.2%.
For the month of October, the Bloomberg Barclays Aggregate Bond Index was down 1.4%. For the year, bonds are down 15.6% and for the 10-year they average at 0.7%. This is the first time on record that bonds have taken such a large decline and the combination of both stocks and bonds being down is almost unheard of in American finance. Maybe this leads to some of the conspiracy theories I will discuss later in this posting.
As mentioned in the prologue, I find it incredible that most Americans believe that we are already in recession. If you recall back in January and February all these so-called experts were beating the table and explaining that recession was unavoidable in 2022, and that in 2023 we would likely see bread lines, foreclosures, and huge bad debts by the banks. I am not sure exactly where those Pundits get their information from, but it is certainly not supported by the facts. You must wonder whether there is a broad conspiracy going around that is convincing the public of something very negative, when in fact, we are in just a normal slowdown in the economy.
I guess the Pundits were shocked when the government reported that the GDP for the third quarter was at 2.6%. While it is true that during the first and second quarters of 2022, the GDP was marginally negative. So, the increase of 2.6% for the third quarter must have been a sure shock to those Pundits that were beating the table and explaining how recession was just around the corner. However, if you want really shocking news, check out the website for the Atlanta Federal Reserve. As I have pointed out on numerous postings before, these preliminary calls on GDP by the Atlanta Federal Reserve have been closer than any other projections. If we were going to have a recession in 2022, the fourth quarter would have to be a large negative number to wipe out the 2.6% earned in the third quarter. However, as strange as it may seem, the Atlanta Federal Reserve is forecasting fourth quarter GDP at a stunning 4% increase. If in fact they are close to that percentage increase for the fourth quarter of 2022, the entire 2022 will be quite satisfactorily higher on a GDP basis.
What confuses me, and I guess most investors, is why these so-called experts are forecasting severe recession when the government itself is forecasting real growth in the current quarter.
I have been on a lot of airplanes lately and I can tell you from personal observation that every seat is full and there is a standby line on every flight I have boarded. Airports are completely run over with people; and as everyone knows, it is almost impossible to get reservations at a good restaurant. I was in New York City over the weekend and most of the hotel rooms were sold out and the city was covered up with tourists. In fact, I began to believe that no one spoke English in New York after the few days there since there were so many tourists from foreign countries. That fact alone should convince you that the world is not in recession, given that whole families were willing to travel from Italy, France, and the Far East to come to New York on vacation.
I have a hard time convincing my own clients to read the facts. I get client telling me that when Facebook starts laying off employees, it must mean we have recession. In recent news, all the major tech companies reported that they would slow down hiring or start laying off people in the coming months. Unlike the explanation of the upcoming recession, this more properly reflects that corporate America is downsizing to a slower economy. That is only good common sense and exactly what they should do if they thought their business would be slower going forward. Absolutely nothing in those statements would be an indication of an upcoming recession.
Also recall, that if you lay off a couple thousand employees by a major employer, as of today, there are still 10.7 million job openings in the U.S. that are not filled. So, if these newly laid-off employees desire to find new employment, they have vast opportunity to do so. As I said often said before, for anybody in America that wants a job, there are plenty available. If someone is without a job, it is most likely that they do not desire to work again.
This gets me back to the title of this posting. If the U.S. is really going to go into recession, the Federal Reserve will have to orchestrate laying off and eliminating over 10 million American jobs. Take that into perspective when you consider employers today cannot find enough workers and especially low-paying jobs that are going unfilled because no one is willing to work for those wages. Will the government now take that situation and aggravate the economy by laying off 10 million additional workers to reduce inflation and slow the economy. I am betting there is no chance in the world that any governmental agency in an election year would eliminate that many jobs and endanger that many families' livelihoods over something as obscure as the inflation rate.
So maybe the Pundits are saying that we are going to see severe recession in 2023 due to the actions of the Federal Reserve and we have just not felt the effects of higher interest rates. There is no question that higher interest rates have slowed the housing industry by pushing long-term housing mortgage rates up above 7%. I do not know if you have noticed but those rates are falling and are now below 7%. Truth be told, most people really do not care what houses cost, they only care what the monthly payments are. With the huge increase in interest rates over the last six months, many young buyers are suffering “sticker shock” with new home pricing. However, I have many clients on the other side of the housing industry, and I can tell you that housing prices are not going to fall if commodity prices for those houses continue to rise. Sure, there will be a slowdown in housing but frankly, there needs to be.
We got a little bit ahead of ourselves in the spring when lumber prices doubled, and supply chain issues made building houses come almost to a standstill. Now that lumber prices are back to normal and the supply chains have opened; efficiency in home building will improve, but it will take some time. So, it is perfectly fine that the economy slowed down some to allow housing to catch up with current demand. The people who write for the financial news and talk about “crashing” home prices and the desperation felt in home building obviously have no clue as to what they are reporting. While last month housing prices declined by 1.5%, given that they have increased by 20% over the last year seems to be a most normal reflection of softer pricing.
The difference that so many of the people writing the financial blogs cannot seem to understand is that we do not have an undersupply of product, we have an oversupply of demand. Coming out of the Covid shutdown for several years, suddenly people wanted to use the money that they had accumulated since they had not been able to do anything in two years and they began to travel and spend money on capital items. We had too few new cars to buy, we had too few used cars to sell, lumber was at exorbitant prices and every airline seat was filled. That is what happens when you have demand in excess of supply. But all of that is slowly receding and supply and demand are more closely aligned today than they were several months ago.
So, when we have more aligned supply and demand, we will start to control inflation. For the month of October inflation was down to 7.7% year over year from 8.2% in September. Remember that I explained that inflation is valuated based on an annual increase this month over same month last year. As we go into the end of the year, we will have much more favorable months to compare, and I fully expect inflation to continue to fall as previously mentioned.
At the very first sign of a significant reduction in inflation, you will see that the Federal Reserve will have to back off this desire to increase interest rates in this economy. It is a fine line to increase interest rates to slow the economy, but under no circumstances would you want to do so to the point where interest rates throw the economy into severe recession. I think the Federal Reserve is very cognizant of this fact and that when they meet in December, the increases in interest rates will be less than the 0.75 that they have been increasing for most of 2022.
So, I talked about the economy, and I talked about what I think the Federal Reserve is going to do, but what really affects stock prices are earnings. With all the talk about the potential of recession, most people have failed to see the reality of what is going on in corporate America. It is amazing to me that bank stocks are not rallying significantly with these higher interest rates. As you know, every time they increase interest rates, the banks make more money, yet bank stocks have been down virtually all year and even flat lately. The Pundits have convinced the public that the reason why bank stocks cannot rise is because with the upcoming recession, the banks will have overwhelming debts and companies that cannot pay their loans. I find that position so preposterous it is even hard to repeat. The banks today are in the most healthy and well capitalized position they have ever been in American finance.
If the Pundits were so correct regarding their projections of inflation and recession in 2022, you would have expected that earnings would fall dramatically. It now looks like that for 2022 in corporate America, net income will go up by 7.5% for the year 2022. What is incredibly coincidental is that is the exact same percentage that they went up in 2021. So, we have no declining employment and no declining earnings by major corporations. Why are the most major stock funds in the world down 30%-40% in the year 2022 and the S&P 500 down 18%?
While I was in New York I had the opportunity to talk to a lot of the fund managers and their reflection on this year was quite surprising. They all indicated that nothing had really changed and that they were evaluating stocks as they had always done. The exclamations seen in the financial press of recession, depression and hyperinflation were to be ignored given that there was no financial support for those positions. While we all recognize and appreciate the slowdown in the economy, there is no indication of a major fallout from corporate America. Therefore, even though their performance this year has been uncharacteristically bad, their position is that you still value stocks the same way and all this hyper talk in the press is probably designed to support a position that the traders have that the invested public does not.
People ask me all the time what my reflection of the recent election was and my thoughts about it going forward. I am quite pleased that the elections appeared to be an even split between the two major parties. I am also very glad that neither party won substantial positions in any of the major house and senate races. I am a firm believer that government works best when it does nothing. It is the old joke Ronald Reagan used to paraphrase all the time, “I am from the government, and I am here to help.” As Ronald Reagan said, anytime the government shows up to help you may rest assured that industry will be worse for that help. Therefore, virtually an even split in Congress and in the Senate should lead to two really good years of the government doing absolutely nothing. As long as the government continues to debate, argue and make excuses and not pass any substantial legislation, we as investors will be much better off.
One of the principal speakers at the seminar I attended was Elon Musk, President of Tesla Motors and various other companies. It was very enlightening to hear his comments. I found this guy brilliant beyond belief. Not only did he start PayPal from scratch, but he also started the very first fully electric car manufacturer, Tesla, SpaceX, Solar City, and Starlink. No one in the history of world had been successful in the building of electric cars before Elon Musk came along. When I listened to him speak, I was so impressed by his intellect. I just wish we had politicians that had above-average intelligence.
One of the things that he said seemed to make a lot of sense. He said that while studying space geography as part of SpaceX, he discovered that there might be as many as one million planets with the same atmospheric conditions as Earth. The difference is that those planets do not have people on them. Maybe at one-point, multiple generations ago they actually had people but they either killed each other in war, a virus wiped out the whole planet or environmental effects got to them. What was interesting about his comments is that he related them to the same effect on the Earth. Here you have one madman in Russia attacking a neighboring country for no good reason and wiping out hundreds of thousands young men. What if someone like him could start a nuclear war and basically eliminate all the people on earth? At least we now know that Elon Musk is certainly thinking about it.
What was fascinating about this conversation was that the very next day when I picked up my phone and looked on the internet, every other article I read was a negative article written about Elon Musk. You would think that if there were anyone to be the darling of the progressives, it would be him. No one before him was able to build an electric car cutting car emissions. Many have tried, but all have failed. Even today, the major car manufacturers are so far behind Tesla that the race is not even fair. Yet the progressives for some reason hate Elon Musk beyond belief. Maybe it is because he is the richest man in the world, or he has become remarkably successful.
Another thing he said that impressed me was that he indicated that the President of the United States should never be more than 15 years older than the average American. If the average American is 38.1 years old, that will make the President’s age around 53. Think about that just for a second when you have Biden and Trump running for political office again at age 80. They are so far removed from the average American’s beliefs and daily activities; I am not sure how they can properly govern a country. Hopefully, in this next Presidential election, we will have some young people willing to run.
If you have an interest in coming down to visit with us, we look forward to seeing you. We are moving into a slower period for our Firm and will have the time to sit down and review your portfolio, taxes, or anything else you might be interested in.
As always, the foregoing includes my opinions, assumptions, and forecasts. It is perfectly possible that I am wrong.
Best Regards,
Joe Rollins
Before I cover all those interesting topics, I need to report on the very excellent month we had in October. The Standard and Poor's Index of 500 Stocks was up 8.1% for the month of October, but yet is still down 17.7% for the year 2022. Once again, I point out the 10-year returns on this index, even with this very down year, average 12.8%. The Dow Jones Industrial Average was up 14.1% for the month of October yet is still down -8.4% for the year 2022. The 10-year average on this index is 12.2%. The NASDAQ Composite was up 4% for the month of October but is still down significantly at 29.3% for the year 2022. The 10-year average on this index, due to its more volatile nature, is also the highest at 15.2%.
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| Ava out for a graceful spin around Central Park |
For the month of October, the Bloomberg Barclays Aggregate Bond Index was down 1.4%. For the year, bonds are down 15.6% and for the 10-year they average at 0.7%. This is the first time on record that bonds have taken such a large decline and the combination of both stocks and bonds being down is almost unheard of in American finance. Maybe this leads to some of the conspiracy theories I will discuss later in this posting.
As mentioned in the prologue, I find it incredible that most Americans believe that we are already in recession. If you recall back in January and February all these so-called experts were beating the table and explaining that recession was unavoidable in 2022, and that in 2023 we would likely see bread lines, foreclosures, and huge bad debts by the banks. I am not sure exactly where those Pundits get their information from, but it is certainly not supported by the facts. You must wonder whether there is a broad conspiracy going around that is convincing the public of something very negative, when in fact, we are in just a normal slowdown in the economy.
 |
Shelley Fietsam’s son, Cameron, dressed to impress for HOCO 2022 |
What confuses me, and I guess most investors, is why these so-called experts are forecasting severe recession when the government itself is forecasting real growth in the current quarter.
I have been on a lot of airplanes lately and I can tell you from personal observation that every seat is full and there is a standby line on every flight I have boarded. Airports are completely run over with people; and as everyone knows, it is almost impossible to get reservations at a good restaurant. I was in New York City over the weekend and most of the hotel rooms were sold out and the city was covered up with tourists. In fact, I began to believe that no one spoke English in New York after the few days there since there were so many tourists from foreign countries. That fact alone should convince you that the world is not in recession, given that whole families were willing to travel from Italy, France, and the Far East to come to New York on vacation.
 |
| Client Chris Barg with Braves’ Dansby Swanson at the Gold Glove Awards in NYC |
Also recall, that if you lay off a couple thousand employees by a major employer, as of today, there are still 10.7 million job openings in the U.S. that are not filled. So, if these newly laid-off employees desire to find new employment, they have vast opportunity to do so. As I said often said before, for anybody in America that wants a job, there are plenty available. If someone is without a job, it is most likely that they do not desire to work again.
This gets me back to the title of this posting. If the U.S. is really going to go into recession, the Federal Reserve will have to orchestrate laying off and eliminating over 10 million American jobs. Take that into perspective when you consider employers today cannot find enough workers and especially low-paying jobs that are going unfilled because no one is willing to work for those wages. Will the government now take that situation and aggravate the economy by laying off 10 million additional workers to reduce inflation and slow the economy. I am betting there is no chance in the world that any governmental agency in an election year would eliminate that many jobs and endanger that many families' livelihoods over something as obscure as the inflation rate.
 |
| Ken Higgins finished his 38th Peachtree Road Race – Way to Go, Ken! |
So maybe the Pundits are saying that we are going to see severe recession in 2023 due to the actions of the Federal Reserve and we have just not felt the effects of higher interest rates. There is no question that higher interest rates have slowed the housing industry by pushing long-term housing mortgage rates up above 7%. I do not know if you have noticed but those rates are falling and are now below 7%. Truth be told, most people really do not care what houses cost, they only care what the monthly payments are. With the huge increase in interest rates over the last six months, many young buyers are suffering “sticker shock” with new home pricing. However, I have many clients on the other side of the housing industry, and I can tell you that housing prices are not going to fall if commodity prices for those houses continue to rise. Sure, there will be a slowdown in housing but frankly, there needs to be.
We got a little bit ahead of ourselves in the spring when lumber prices doubled, and supply chain issues made building houses come almost to a standstill. Now that lumber prices are back to normal and the supply chains have opened; efficiency in home building will improve, but it will take some time. So, it is perfectly fine that the economy slowed down some to allow housing to catch up with current demand. The people who write for the financial news and talk about “crashing” home prices and the desperation felt in home building obviously have no clue as to what they are reporting. While last month housing prices declined by 1.5%, given that they have increased by 20% over the last year seems to be a most normal reflection of softer pricing.
 |
| Bob and Margaret Cash preparing for a bike ride through Burgundy, France – À tout à l’heure! |
The difference that so many of the people writing the financial blogs cannot seem to understand is that we do not have an undersupply of product, we have an oversupply of demand. Coming out of the Covid shutdown for several years, suddenly people wanted to use the money that they had accumulated since they had not been able to do anything in two years and they began to travel and spend money on capital items. We had too few new cars to buy, we had too few used cars to sell, lumber was at exorbitant prices and every airline seat was filled. That is what happens when you have demand in excess of supply. But all of that is slowly receding and supply and demand are more closely aligned today than they were several months ago.
So, when we have more aligned supply and demand, we will start to control inflation. For the month of October inflation was down to 7.7% year over year from 8.2% in September. Remember that I explained that inflation is valuated based on an annual increase this month over same month last year. As we go into the end of the year, we will have much more favorable months to compare, and I fully expect inflation to continue to fall as previously mentioned.
 |
| Long-time client Claude Hoopes shares the beauty of Maine! |
At the very first sign of a significant reduction in inflation, you will see that the Federal Reserve will have to back off this desire to increase interest rates in this economy. It is a fine line to increase interest rates to slow the economy, but under no circumstances would you want to do so to the point where interest rates throw the economy into severe recession. I think the Federal Reserve is very cognizant of this fact and that when they meet in December, the increases in interest rates will be less than the 0.75 that they have been increasing for most of 2022.
So, I talked about the economy, and I talked about what I think the Federal Reserve is going to do, but what really affects stock prices are earnings. With all the talk about the potential of recession, most people have failed to see the reality of what is going on in corporate America. It is amazing to me that bank stocks are not rallying significantly with these higher interest rates. As you know, every time they increase interest rates, the banks make more money, yet bank stocks have been down virtually all year and even flat lately. The Pundits have convinced the public that the reason why bank stocks cannot rise is because with the upcoming recession, the banks will have overwhelming debts and companies that cannot pay their loans. I find that position so preposterous it is even hard to repeat. The banks today are in the most healthy and well capitalized position they have ever been in American finance.
If the Pundits were so correct regarding their projections of inflation and recession in 2022, you would have expected that earnings would fall dramatically. It now looks like that for 2022 in corporate America, net income will go up by 7.5% for the year 2022. What is incredibly coincidental is that is the exact same percentage that they went up in 2021. So, we have no declining employment and no declining earnings by major corporations. Why are the most major stock funds in the world down 30%-40% in the year 2022 and the S&P 500 down 18%?
 |
| Proud moment - Randy and Kathy Wittman introducing their 3rd grandchild! |
While I was in New York I had the opportunity to talk to a lot of the fund managers and their reflection on this year was quite surprising. They all indicated that nothing had really changed and that they were evaluating stocks as they had always done. The exclamations seen in the financial press of recession, depression and hyperinflation were to be ignored given that there was no financial support for those positions. While we all recognize and appreciate the slowdown in the economy, there is no indication of a major fallout from corporate America. Therefore, even though their performance this year has been uncharacteristically bad, their position is that you still value stocks the same way and all this hyper talk in the press is probably designed to support a position that the traders have that the invested public does not.
People ask me all the time what my reflection of the recent election was and my thoughts about it going forward. I am quite pleased that the elections appeared to be an even split between the two major parties. I am also very glad that neither party won substantial positions in any of the major house and senate races. I am a firm believer that government works best when it does nothing. It is the old joke Ronald Reagan used to paraphrase all the time, “I am from the government, and I am here to help.” As Ronald Reagan said, anytime the government shows up to help you may rest assured that industry will be worse for that help. Therefore, virtually an even split in Congress and in the Senate should lead to two really good years of the government doing absolutely nothing. As long as the government continues to debate, argue and make excuses and not pass any substantial legislation, we as investors will be much better off.
 |
| Ava and Dakota Rollins in the Big Apple |
One of the principal speakers at the seminar I attended was Elon Musk, President of Tesla Motors and various other companies. It was very enlightening to hear his comments. I found this guy brilliant beyond belief. Not only did he start PayPal from scratch, but he also started the very first fully electric car manufacturer, Tesla, SpaceX, Solar City, and Starlink. No one in the history of world had been successful in the building of electric cars before Elon Musk came along. When I listened to him speak, I was so impressed by his intellect. I just wish we had politicians that had above-average intelligence.
One of the things that he said seemed to make a lot of sense. He said that while studying space geography as part of SpaceX, he discovered that there might be as many as one million planets with the same atmospheric conditions as Earth. The difference is that those planets do not have people on them. Maybe at one-point, multiple generations ago they actually had people but they either killed each other in war, a virus wiped out the whole planet or environmental effects got to them. What was interesting about his comments is that he related them to the same effect on the Earth. Here you have one madman in Russia attacking a neighboring country for no good reason and wiping out hundreds of thousands young men. What if someone like him could start a nuclear war and basically eliminate all the people on earth? At least we now know that Elon Musk is certainly thinking about it.
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| One last pit stop before heading home... |
What was fascinating about this conversation was that the very next day when I picked up my phone and looked on the internet, every other article I read was a negative article written about Elon Musk. You would think that if there were anyone to be the darling of the progressives, it would be him. No one before him was able to build an electric car cutting car emissions. Many have tried, but all have failed. Even today, the major car manufacturers are so far behind Tesla that the race is not even fair. Yet the progressives for some reason hate Elon Musk beyond belief. Maybe it is because he is the richest man in the world, or he has become remarkably successful.
Another thing he said that impressed me was that he indicated that the President of the United States should never be more than 15 years older than the average American. If the average American is 38.1 years old, that will make the President’s age around 53. Think about that just for a second when you have Biden and Trump running for political office again at age 80. They are so far removed from the average American’s beliefs and daily activities; I am not sure how they can properly govern a country. Hopefully, in this next Presidential election, we will have some young people willing to run.
If you have an interest in coming down to visit with us, we look forward to seeing you. We are moving into a slower period for our Firm and will have the time to sit down and review your portfolio, taxes, or anything else you might be interested in.
As always, the foregoing includes my opinions, assumptions, and forecasts. It is perfectly possible that I am wrong.
Best Regards,
Joe Rollins
All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.
This commentary contains forward-looking statements, which are provided to allow clients and potential clients the opportunity to understand our beliefs and opinions in respect of the future. These statements are not guarantees, and undue reliance should not be placed on them. Forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual results in future periods to differ materially from our expectations. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.
